One Year Later

It has been just over a year since the Financial Accounting Standards Board (FASB) suspended mark-to-market accounting.  Since that time, when the Dow Jones Industrial Average was around 8,000, the market has gained about 35% in value.

No one is attributing the market rise solely to the change in accounting rules, but it can be argued that the change did have a positive influence on the overall state of the economy. Certainty over asset prices and the decreased volatility helped.

The banking sector, for example, was significantly impacted by the old mark-to-market rule. Since last year banks have been posting steadily improving profits. Citigroup recently announced a $4.4B for Q1 2010, their best in two years; JP Morgan Chase posted $3.3B for Q1 2010, up 55% from the prior year; and Bank of America exceeded analyst expectations with a $3.2B gain for Q1 2010.

Additionally it can be argued that the capitalization pressure on banks that was relieved by easing mark-to-market also made credit more readily available —credit that was necessary in every sector of the economy.

Bankers and Congress did pressure the FASB last year to change the rule. And although less onerous, the new mark to model version isn’t a license to mark things at any level the banks find convenient. There must be an economic rational for the marks, and the SEC can remind auditors that it is their job to make sure that is done prudently.

This all seems to be working. Let’s not change it now, or acquiesce to European rules. If it’s not broke…